Time vs. Rate…Do you know the truth?
Everywhere you look on the news foreclosure rate is the topic of the day. Interest only loans are all the rage in the new millennium, but those people who got them are now “house poor” finding themselves in negative amortization situations! Not to mention “there are still 1.8 million adjustable-rate mortgages (ARMs) which will reset to higher rates between now and the end of the next year,” said George Boelcke, author of It’s Your Money! Tools, Tips & Tricks to Borrow Smarter and Pay It Off Quicker, in an American Chronicle article last year. So all this has everyone pondering how we got here. Why does it seem like everybody in America is in debt? Well, the partial answer to that is because when we borrow money we ask the wrong questions. The first thing out of our mouths is, “What’s my rate and what’s my payment?” As long as the lender has a satisfying answer, WE’LL TAKE IT! What we should be asking is “What’s my total cost going to be and when will I be out of debt?” After all, what’s more important…interest rate or time in debt? Sadly, because most Americans have had a good brainwashing they really believe the answer is interest rate! I’ve actually had clients brag to me about how low their rate is and how they won’t refinance because they can’t find a lower rate than the one they have to which I just shake my head and think, “another one bites the dust”. Allow me to illustrate how this little brainwashing game has worked to the mortgage industry’s benefit…not yours.
Suppose you and I became lenders and started a mortgage business together. Now the only way we can get paid is if people have what? A mortgage, right? So do we have any financial interest in helping people get OUT of debt? Well, let me ask you this, “Does your mortgage company in general seem interested in seeing YOU get out of debt?” Now for the all important question, “if you and I are mortgage lenders are we more focused on the interest rate we give the client or on how much money they are going to pay us over time?” If you said how much money they’re going to pay us, you are starting to see the light! Aren’t companies focused on their bottom line which is profits? Simple rules of business say if you and I are in business we want our profits going up not down which means we give clients something to focus on and obsess over (i.e. the interest rate game) while we focus on increasing our bottom line! We know they’ll be so focused on having a 4.5%, 5% or 6% “low” interest rate they won’t even be thinking about their total cost over time! They’ll be too busy savoring their “supposedly” great interest rate!
If you haven’t done your homework, please do, and you will realize the mortgage industry has recently come out with 40 and 50 year mortgages. And why do you think that is? If their goal is more profits they can most certainly get them by keeping clients in debt for longer periods of time, and if they tell you that spreading your mortgage out longer than 30 years will give you a lower payment, they bank on poor misguided people saying, I’LL TAKE IT!
When I sit down with clients I teach them to focus on the same thing the mortgage companies focus on which is often hard for them to accept. (In fact they don’t believe me at first! It takes awhile to reverse the “interest rate” brainwashing!) But once I show them big picture right in their own mortgage documents on a little piece of paper called the “Truth in Lending Statement” it usually becomes very hard to argue the “time vs. interest rate” point.
Proverbs 22:7 says, “The rich rule over the poor and the borrower is servant to the lender.” As the rule and not the exception Americans have become servants to their credit cards, car loans, and unfortunately, their mortgages. So the question you really need to ask yourself is, “Are you really interested in being a servant too?”
Pocahontas is a licensed Financial Coach and has been in the industry since 2005. She can be reached at email@example.com.